Castle Biosciences Inc (NASDAQ: CSTL) reported its Q2 earnings yesterday for the quarter ended June 30, 2022. Results far exceeded analyst expectations. Earnings per share (EPS) of -$0.06 beat FactSet consensus estimates of -$0.76 by 92.1%. And company revenues came in at $34.84m, beating FactSet's sales consensus of $28.37m by 22.8%.
The CSTL share price is up 12.36% in pre-market trading.
What is Castle Biosciences?
Castle Biosciences Inc (NASDAQ: CSTL) is a diagnostic testing company involved in genetic testing and early cancer detection.
Castle Biosciences' range of tests can give patients insight into their underlying health. The value patients get from their test results includes increased knowledge and understanding of their disease, more personalized treatment options, information relevant to life planning, and relief from uncertainty about the future.
In May, the company was selected as the winner of the "Best New Technology Solution - Dermatology" award in the sixth annual MedTech Breakthrough Awards program for its innovative DecisionDx-Melanoma gene expression profile (GEP) test.
The company was founded by Derek J. Maetzold in September 2007 and is headquartered in Friendswood, Texas.
CSTL Q2 Financial Results
Revenue: $34.8m (up 53% Y/Y)
Delivered: 11,034 total test reports (up 57% Y/Y)
Skin cancer gene expression profile test report volume increased 44% Y/Y
FY Revenue Guidance: Raised to between $130m and $135m (from $118m and $123m)
Gross margin: 72%
Adjusted gross margin: 78%
Operating cash flow: -$9m (from -$6.4m Y/Y)
Net loss: -$1.6m (from -$8.8m Y/Y)
Adjusted EBITDA: - $10.9m (from -$3.4m Y/Y)
As of June 30, 2022, the company's cash and cash equivalents totaled $273m.
Derek Maetzold, President and CEO of Castle Biosciences, said:
In the second quarter, we saw strong execution across the Castle team, which produced another quarter of record test report volume,
In our core dermatology business, we delivered a 44% increase in test report volume over the second quarter of 2021 and a 16% increase over the first quarter of 2022.
We believe our continued momentum is directly linked to the clinical value our tests provide to clinicians and their patients, coupled with the focused investments we have made and continue to make in our business.
The company has some notable collaborations underway. For instance, it is working with the National Cancer Institute (NCI) to link its DecisionDx®-Melanoma testing data with data from the Surveillance, Epidemiology and End Results (SEER) program registries on cutaneous melanoma cases.
This link-up of data with a real-world cohort showed that patients diagnosed with melanoma and tested with DecisionDx-Melanoma had improved survival (27% improvement in melanoma-specific survival) compared to untested patients. Castle Biosciences expects to generate further data from this collaboration in time.
The company is collaborating with the Oregon Health & Science University's (OHSU) public health campaign named the War on Melanoma.
Castle Biosciences also partners with Research to Prevent Blindness (RPB). Through the RPB/Castle Biosciences Medical Student Eye Research Fellowship in Ocular Cancer, their funding allows medical students to take a year off from medical school to devote time to pursuing a research project within an RPB-supported department of ophthalmology.
In May, the company collaborated with Camille Schrier, Miss America 2020, as part of Mental Health Awareness Month to promote the potential of genetic testing and the IDgenetix test to help improve treatment for mental health conditions.
Castle Biosciences is also making progress in gastroenterology and mental health since making acquisitions it believes will contribute to its anticipated operating cash-flow neutrality by 2025.
Derek Maetzold, President and CEO of Castle Biosciences, said:
Our progress is the direct result of our dedicated team of professionals at Castle, who are committed to improving health through the innovative tests we offer. Thanks to their efforts, we believe Castle will continue with the current momentum we have seen and continue creating value for stockholders.
How Does Castle Biosciences Make Money?
Castle Biosciences makes money from contracts with customers buying its diagnostic and prognostic testing services. Most of the company's revenues come from its DecisionDx®-Melanoma test for cutaneous melanoma.
The company also sells tests for additional cancerous skin conditions and a test for patients diagnosed with Barrett's esophagus.
It recently began offering a testing service focused on mental health, following a business combination completed in April 2022.
Most payments for Castle Biosciences services come from third parties, including Medicare and commercial health insurance carriers.
CSTL Stock Financials
Over the past year, Castle Biosciences Inc (CSTL) has traded between $15.58 and $78.58. Today it deals for around $32.
Year-to-date, Castle Biosciences Inc (CSTL) stock is down by -37.58%, while the S&P 500 is down -13.69% over the same period.
CSTL stock has a price-to-book-value (P/BV) of 1.8, which is above the industry average of 0.7. CSTL stock does not offer shareholders a dividend.
CSTL Growth Potential
With cancer cases rising and access to health services costly or increasingly difficult, patients are keen to obtain early diagnosis to increase their chances of a long and healthy life. Diagnostic and prognostic testing plays a critical part in this process, and Castle Biosciences is at the forefront of the testing revolution.
Castle Biosciences is also in the early stages of launch with TissueCypher, its Barrett's esophagus test, which it hopes to ramp up in the coming months. Its target is to administer this test to over 348,000 patients a year. This year, the average price for this TissueCypher test is $2,350, per the Medicare reimbursement rate. But this price will change next year.
The company delivered 352 of its TissueCypher Barrett’s esophagus test reports in Q2, up from 56 in Q1, which aligns with its projected monthly growth trends.
Castle Biosciences has grown steadily via its M&A strategy in recent years and hopes this will pay off in the coming years.
The company will host an Investor Day on September 20, 2022, to provide an in-depth corporate update on its growth initiatives and plan for long-term value creation.
CSTL Stock Risks
A new drug pricing reform package being signed into law will soon allow the US government to negotiate discounts from drugmakers. This will affect Medicare drug pricing and is something shareholders should keep in mind when assessing future revenue estimates.
The company is increasing its spending on personnel costs, including salaries, bonuses and stock-based compensation. It is also spending more on clinical studies.
This is a highly competitive industry, and getting physicians to pay for these tests is challenging.
Should You Invest in Castle Biosciences?
Castle Biosciences is improving health through its innovative tests guiding patient care. This is an area of growing demand as patients seek early diagnosis and answers to help them achieve optimum health.
The company's Q2 results were a positive surprise and gave shareholders hope for a lucrative future. There's no doubt this remains a speculative investment, but it does generate cash, which, along with its M&A strategy, appeals to risk-taking investors.
FactSet analysts have a consensus Buy rating on CSTL stock with a target share price of $49.57.
On August 9, 2022, Canaccord Genuity analyst, Kyle Mikson, gave CSTL stock a Buy rating with a target share price of $65. Meanwhile, Puneet Souda at SVB Securities reiterated his Buy rating on the stock with a target share price of $50.
Whether you should buy shares in Castle Biosciences depends on your appetite for risk and investing time horizon.